text: Background BSA/AML Regulation and Enforcement for Banks and Money Transmitters The BSA established reporting, recordkeeping, and other AML requirements for financial institutions. Regulation under and enforcement of BSA involves several federal agencies. FinCEN is responsible for administering the BSA and has authority for enforcing compliance with its requirements and implementing regulations, including through civil money penalties. FinCEN issues regulations under BSA and delegated BSA/AML examination authority for banks to the federal banking regulators. The federal banking regulators have issued their own BSA regulations that require banks to establish and maintain a BSA/AML compliance program. The federal banking regulators may take enforcement actions for violations of BSA/AML requirements. They may also assess civil money penalties against financial institutions and individuals independently, or concurrently with FinCEN. Both federal and state agencies oversee money transmitters. FinCEN has delegated examination authority for BSA compliance for money transmitters to the Internal Revenue Service (IRS). Money transmitters must register with FinCEN and provide information on their structure and ownership. According to Treasury, in all states except one, money transmitters are required to obtain licenses from states in which they are incorporated or conducting business. All banks and money transmitters are required to establish an AML compliance program that includes policies, procedures, and processes which, at a minimum, must provide for (1) a system of internal controls to ensure ongoing compliance, (2) a designated individual or individuals responsible for managing BSA compliance (BSA compliance officer), (3) training for appropriate personnel, and (4) independent testing for BSA/AML compliance. Additionally, as of May 11, 2018, banks and certain other financial institutions are required to implement appropriate risk-based procedures for conducting ongoing customer due diligence. Banks must also have policies and procedures for opening accounts and verifying the identity of each customer and monitoring transactions and reporting suspicious activity. Finally, banks and money transmitters must comply with certain reporting requirements, including the following: CTR: A bank must electronically file a CTR for each transaction in currency—such as a deposit or withdrawal—of more than $10,000 SAR: Banks are required to electronically file a SAR when a transaction involves or aggregates at least $5,000 in funds or other assets, and the institution knows, suspects, or has reason to suspect that the transaction meets certain criteria qualifying as suspicious. Remittance Transfer Methods Remittances can be sent through money transmitters and banks, among other organizations. International remittances through money transmitters and banks may include cash-to-cash money transfers, international wire transfers, some prepaid money card transfers, and automated clearinghouse transactions. If a remittance sender’s bank does not have a direct relationship with the remittance recipient’s bank, the bank-to-bank transfer scenario becomes more complicated. In such cases, one or more financial institutions may rely upon correspondent banking relationships to complete the transaction. A typical remittance sent through a bank may be in the thousands of dollars, while the typical remittance sent by money transmitters is usually in the hundreds of dollars. Historically, many consumers have chosen to send remittances through money transmitters due to convenience, cost, familiarity, or tradition. Money transmitters typically work through agents—separate business entities generally authorized to, among other things, send and receive money transfers. Money transmitters generally operate through their own retail storefronts, or through grocery stores, financial services outlets, convenience stores, and other retailers that serve as agents. Figure 1 shows one type of common money transmitter transaction known as cash-to-cash transfer. Remittances to Case Study Countries Remittances from the United States are an important source of funds for our case-study countries—Haiti, Liberia, Nepal, and Somalia. The Organisation for Economic Co-operation and Development identified these countries as fragile states because of weak capacity to carry out basic governance functions, among other things, and their vulnerability to internal and external shocks such as economic crises or natural disasters. Risks Related to Money Laundering Appeared to Be a Factor in Reduced Access to Banking Services for Southwest Border Customers In our February 2018 report, we found that money laundering risk is high in the Southwest border region because of the high volume of cash transactions, the number of cross-border transactions, and foreign account holders. Our nationally representative survey found that many Southwest border banks may be engaging in derisking. Nationally, our econometric analysis suggested that counties that were urban, younger, had higher income, or had higher money laundering-related risk were more likely to lose branches. Money laundering-related risks were likely to have been relatively more important drivers of branch closures in the Southwest border region. Southwest Border Banks Reported Heightened BSA/AML Compliance Risks and Challenges Due to Volume of High-Risk Customers In February 2018, we reported that money laundering risk is high in the Southwest border region because of the high volume of cash transactions, the number of cross-border transactions, and foreign account holders, according to bank representatives, federal banking regulators, and others we spoke with. Cash transactions increase the BSA/AML compliance risk for banks because the greater anonymity associated with using cash results in greater risk for money laundering or terrorist financing. Our review of data on banks’ CTR filings confirmed that bank branches that operate in Southwest border region counties handled more large cash transactions than bank branches elsewhere. Specifically, in 2016, bank branches in Southwest border region counties filed nearly 30 percent more CTRs, on average, than bank branches in comparable counties elsewhere in their same state, and about 60 percent more than those in other high-risk counties outside the region. Similar differences occurred in 2014 and 2015. We also reported that cross-border transactions are at a higher risk for money laundering because international transfers can present an attractive method to disguise the source of funds derived from illegal activity. Southwest border banks cited foreign account holders as another type of high-risk customer for money laundering and terrorist financing. These types of customers are prevalent in the Southwest border region, examiners said, and can create challenges for banks to verify and authenticate their identification, source of funds, and source of wealth. The volume of high-risk customers and cross-border transactions can lead to more intensive account monitoring and investigation of suspicious transactions, Southwest border bank representatives said. Performing effective due diligence and complying with customer identification requirements for higher-risk customers and transactions can be more challenging because banks might need specialized processes for higher- risk customers and transactions than for those that are lower risk. Southwest border bank representatives we spoke with said addressing these compliance challenges can also require more resources for monitoring high-risk customers and investigating suspicious transactions. For example, in 2016, bank branches in the Southwest border region counties filed three times as many SARs, on average, as bank branches operating in other counties within Southwest border states and about 2.5 times as many SARs, on average, as bank branches in other high-risk financial crime or drug trafficking counties in nonborder states. These differences in SAR filings showed a similar pattern in 2014 and 2015. Some Account Terminations and Limitations Were Consistent with BSA/AML Purposes In February 2018, we found that most Southwest border banks reported terminating accounts for reasons related to BSA/AML risk. Based on our survey results, from January 1, 2014, through December 31, 2016, we estimated that almost 80 percent of Southwest border banks had terminated personal or business accounts for reasons related to BSA/AML risk. The most common reasons related to BSA/AML risk Southwest border banks reported for terminating accounts were the filing of SARs associated with the accounts, the failure of the customer to respond adequately to requests for information as part of customer due diligence processes, and the reputational risk associated with the customer type (an estimated 93 percent, 80 percent, and 68 percent, respectively). Of the high-risk businesses for money laundering and terrorist financing that we identified in our survey, cash-intensive small businesses (for example, retail stores, restaurants, and used car dealers) were the most common type of business accounts that Southwest border banks reported terminating accounts for reasons related to BSA/AML risk. Over 70 percent of Southwest border banks reported terminating these accounts. A majority of Southwest border banks and banks that did not operate in the Southwest border region (non-Southwest border banks) reported limiting or not offering accounts to certain types of businesses considered high risk for money laundering and terrorist financing, particularly money services businesses and foreign businesses. The most common reason (cited by 88 percent of Southwest border banks) for limiting, or not offering, an account to these types of businesses was that the business type fell outside of the bank’s risk tolerance—the acceptable level of risk an organization is willing to accept around specific objectives. Similarly, 69 percent of Southwest border banks cited the inability to manage the BSA/AML risk associated with the customer (for example, because of resource constraints) as a factor for limiting, or not offering, accounts. Similarly, the most common reason that non-Southwest border banks reported limiting, or not offering accounts, to certain types of businesses considered high risk for money laundering and terrorist financing was that the customer type fell outside of the bank’s risk tolerance. Other Account Terminations and Limitations Raised Concerns about Derisking Further, in February 2018 we found that the second most common reason—cited by 80 percent of Southwest border banks—for limiting, or not offering, accounts to certain types of businesses considered high risk for money laundering and terrorist financing, was that the customer type drew heightened BSA/AML regulatory oversight—behavior that could indicate derisking. For example, representatives from one Southwest border bank explained that they no longer offer accounts to money services businesses because they want to be viewed from a good standpoint with their regulator. They added that banking for these types of customers is very high risk for the bank with very little reward. Another bank that operates in the Southwest border region explained that rather than being able to focus on their own BSA/AML risk assessment and the performance of accounts, they feel pressured to make arbitrary decisions to close accounts based on specific concerns of their examiners. Several Southwest border bank representatives also described how recent BSA/AML law enforcement and regulatory enforcement actions have caused them to become more conservative in the types of businesses for which they offer accounts. In addition, while banks may terminate accounts because of SAR filings as a method to manage money laundering and terrorist financing risk and to comply with BSA/AML requirements, some of these terminations may be related to derisking. For example, some Southwest border bank representatives we spoke with for our Southwest border report, as well as other banks and credit unions we spoke with in a February 2009 review, told us that they have filed SARs to avoid potential criticism during examinations, not because they thought the observed activity was suspicious. Non- Southwest border banks also commonly cited the inability to manage risk associated with the customer type and heightened regulatory oversight as reasons for limiting, or not offering, accounts. Southwest Border Bank Branch Closures Have Been Concentrated in a Small Number of Communities Counties in the Southwest border region have been losing bank branches since 2012, similar to national and regional trends, as well as trends in other high-risk financial crime or drug trafficking counties that are outside the region. In February 2018, we found that most of the 32 counties (18 counties or nearly 60 percent) comprising the Southwest border region did not lose bank branches from 2013 through 2016, but 5 counties lost 10 percent or more of their branches over this time period (see top panel of fig. 2). Those 5 counties are Cochise, Santa Cruz, and Yuma, Arizona; Imperial, California; and Luna, New Mexico. Within those counties we identified as having the largest percentage loss of branches, sometimes those losses were concentrated in smaller communities within the county (see bottom panel of fig. 2). For example, Calexico in Imperial County, California, lost 5 of its 6 branches from 2013 through 2016. In Santa Cruz County in Arizona, one zip code in Nogales accounted for all of the branch losses in the county from 2013 through 2016, losing 3 of its 9 branches. More generally, branch losses varied substantially across different zip codes in a county (see for example bottom panel of fig. 2). In other instances, counties that lost a relatively small share of their branches contained communities that lost a more substantial share—for example San Ysidro in San Diego County lost 5 of its 12 branches (about 42 percent) while the county as a whole lost only 5 percent of its branches from 2013 through 2016. Based on our analysis, counties losing branches in the Southwest border region tended to have substantially higher SAR filings, on average, than Southwest border region counties that did not lose branches. That is, counties that lost branches from 2013 through 2016 had about 600 SAR filings per billion dollars in deposits, on average, and counties that did not lose branches had about 60 SAR filings per billion dollars in deposits, on average (see fig. 3). Empirical Evidence Suggested Demographic and Money Laundering- Related Risk Factors Are Drivers of Branch Closures The econometric models we developed and estimated for our February 2018 report generally found that demographic and money laundering- related risk factors were important predictors of national bank branch closures. In general, our results suggested that counties were more likely to lose branches, all else equal, if they were (1) urban, had a higher per capita personal income, and had a younger population (proportion under 45); or (2) designated as a HIFCA or HIDTA county, or had higher SAR filings. We termed the latter three characteristics (HIFCA, HIDTA, and SAR filings) “money laundering-related risk factors.” Our results were consistent with those demographic characteristics associated with the adoption of mobile banking. As such, our results were consistent with the hypothesis that mobile banking is among the factors leading some banks to close branches. The most urban counties were about 22 percentage points more likely to lose one or more branches over the next year than the most rural counties. A county with 70 percent of the population under 45 was about 9 percentage points more likely to lose one or more branches over the next year than a county with half the population under 45. A county with per capita income of $50,000 was about 7 percentage points more likely to lose one or more branches over the next year than a county with per capita income of $20,000. Money laundering-related characteristics of a county were also important predictors of branch closures in our models. HIDTA counties were about 11 percentage points more likely to lose one or more branches over the next year than non-HIDTA counties (the effect in HIFCA counties is less significant statistically and smaller in magnitude). A county with 200 SARs filed per billion dollars in bank deposits was about 8 percentage points more likely to lose one or more bank branches over the next year than a county where no bank branch had filed a SAR. Money laundering-related risk factors were likely to have been relatively more important drivers of branch closures in the Southwest border region because it had much higher SAR filings and a larger share of counties designated as HIDTAs than the rest of the country. More generally, given the characteristics of Southwest border counties and the rest of the United States, our models suggested that while demographic factors have been important drivers of branch closures in the United States overall, risks associated with money laundering were likely to have been relatively more important in the Southwest border region. Southwest border bank representatives we interviewed told us they considered a range of factors when deciding whether or not to close a branch. Nearly half of the Southwest border bank representatives we spoke with (4 of 10), mentioned that BSA/AML compliance costs could be among the factors considered in determining whether or not to close a branch. Money Transmitters Serving Selected Fragile Countries Noted Loss of Banking Access, Although Treasury Saw No Reduction in Remittance Flows In March 2018, we found that money transmitters serving Haiti, Liberia, Nepal, and especially Somalia reported losing bank accounts or having restrictions placed on them, which some banks confirmed. As a result, some money transmitters relied on nonbanking channels, such as cash couriers, to transfer remittances. All of the 12 money transmitters we interviewed at the time reported losing some banking relationships in the last 10 years. Some money transmitters, including all 4 that served Somalia, said they relied on nonbanking channels, such as moving cash, to transfer funds, which increased their operational costs and exposure to risks. Further, in our interviews some banks reported that they had closed the accounts of money transmitters because of the high cost of due diligence actions they considered necessary to minimize the risk of fines under BSA/AML regulations. Treasury officials noted that despite information that some money transmitters have lost banking accounts, Treasury saw no evidence that the volume of remittances was falling or that costs of sending remittances were rising. All Money Transmitters We Interviewed Reported They Lost Bank Accounts, Which for Many Resulted in Higher Costs and a Shift to Nonbanking Channels All 12 money transmitters we interviewed for our March 2018 report stated that they or their agents had lost accounts with banks during the last 10 years. All 4 Somali money transmitters and many agents of the 2 Haitian money transmitters we spoke with reported they had lost some bank accounts, and 2 of the 4 Somali money transmitters reported losing all bank accounts. Additionally, all 4 large money transmitters that process transfers globally (including to our case-study countries of Haiti, Liberia, and Nepal) also reported that their agents had lost accounts. Almost all of the money transmitters said they also faced difficulties in getting new accounts. While some money transmitters said the banks that closed their accounts did not provide a reason, in other cases, money transmitters said the banks told them that they had received pressure from regulators to terminate money transmitter accounts. As a result of losing access to bank accounts, several money transmitters, including all of the Somali money transmitters, reported that they were using nonbanking channels to transfer funds. In some cases the money transmitter was forced to conduct operations in cash, which increased the risk of theft and forfeitures and led to increased risk for agents and couriers. Nine of the money transmitters that we interviewed reported they rely on couriers or armored trucks to transport cash domestically (to the money transmitter’s main offices or bank) or, in the case of Somalia, internationally. Money transmitters reported they use cash couriers either because the money transmitter or their agents had lost bank accounts or because it was cheaper to use armored trucks than banks to move funds. Money transmitters we interviewed reported increased costs associated with moving cash and bank fees. Two of the money transmitters we spoke to stated that they did not have options other than to pay any fees the bank required due to the difficulty in finding new bank accounts. Money transmitters with access to bank accounts reported that bank charges for services had in some cases doubled or tripled, or were so high that it was less expensive to use a cash courier. For example, some money transmitters stated that their banks charged a monthly fee for compliance-related costs that ranged from $100 a month to several thousand dollars a month. Some Banks Reported Closing or Denying Accounts for Money Transmitters, Citing Insufficient Profit to Offset Risks and Costs Most of the banks we interviewed for our March 2018 report expressed concerns about account holders who are money transmitters because they tended to be low-profit, high-risk clients. Most of the banks we interviewed that serve money transmitters stated that BSA/AML compliance costs have significantly increased in the last 10 years because they had to hire additional staff and upgrade information systems to conduct electronic monitoring of all transactions processed through their system. Some banks indicated in our survey and interviews that the revenue from money transmitter accounts was at times not sufficient to offset the costs of BSA/AML compliance, leading to terminations and restrictions on money transmitter accounts. A few banks we interviewed stated that they do not allow money transmitters to open accounts because of the BSA/AML compliance resources they require. Banks also expressed concerns over the adequacy of money transmitters’ ability to conduct due diligence on the money transmitter’s customers. A few banks we interviewed expressed concern that they would be held responsible if, despite the bank carrying out due diligence, authorities detected an illicit transaction had been processed through the bank on behalf of a money transmitter. Treasury Officials Said Remittance Flows to Fragile Countries Have Not Declined; Remittance Senders Reported No Major Difficulties In our March 2018 report, we found that Treasury officials reported remittances continue to flow to fragile countries even though money transmitters faced challenges. Through engagement with money transmitters and banks, Treasury found some evidence of money transmitter bank account closures. However, according to Treasury officials, World Bank estimates of remittance flows show that the volume of international transfers from the United States has continued to increase. At the same time, World Bank data indicate that the global average cost of sending remittances has continued to decrease. Citing these trends, and anecdotal evidence from Treasury’s engagement with banks, the officials stated that there were no clear systemic impacts on the flow of remittances from closures of money transmitter bank accounts and correspondent banking relations. Treasury officials acknowledged that such closures can be a significant challenge for money transmitters that serve certain regions or countries, including Somalia. Further, Treasury officials said they were aware that some Somali money transmitters resorted to nonbanking channels by carrying cash overseas. They noted that although physically moving cash is risky, it is not unlawful. Additionally, Treasury officials stated that the use of cash couriers to remit funds had not been a concern for regulators because this practice had not increased the remittance fees that money transmitters charge their consumers. Remittance senders in the United States who remit to our case-study countries reported that they frequently used money transmitters and had not encountered major difficulties in sending remittances. Senders told us that they generally preferred using money transmitters over other methods because money transmitters were cheaper than banks and were quicker in delivering the funds than other methods. In addition, money transmitters were often more accessible for recipients collecting the remittances because the money transmitters had more locations than banks in recipient countries. However, some remittance senders told us that they were unable to send large amounts of money through money transmitters. Regulators Have Not Evaluated All Factors Influencing Banks to Derisk and Treasury Lacks Data Needed to Assess Possible Effects on Remittance Flows In February 2018 we reported that to address concerns about derisking, FinCEN and the federal banking regulators had taken actions including issuing guidance to banks and conducting some evaluations to assess the extent to which derisking is occurring. However, the actions regulators had taken to address concerns raised in their BSA/AML regulatory reviews were limited in scope (for example, they focused primarily on the burden resulting from the filing of CTRs and SARs) and had not evaluated all factors that may influence banks to derisk or close branches. Moreover, in March 2018 we found that Treasury could not assess the effects of money transmitters’ loss of banking access on remittance flows because existing data did not allow Treasury to identify remittances transferred through banking and nonbanking channels. Regulators Issued Guidance and Took Some Actions Related to Derisking In February 2018, we reported that FinCEN and the federal banking regulators responded to concerns about derisking on a national level by issuing guidance to banks and conducting some evaluations within their agencies to understand the extent to which derisking is occurring. The guidance issued by regulators was aimed at clarifying BSA/AML regulatory expectations and discouraging banks from terminating accounts without evaluating risk presented by individual customers or banks’ abilities to manage risks. The guidance generally encouraged banks to use a risk-based approach to evaluate individual customer risks and not to eliminate entire categories of customers. Some of the guidance issued by regulators attempted to clarify their expectations specifically for banks’ offering of services to money services businesses, including money transmitters. For example, in March 2005, the federal banking regulators and FinCEN issued a joint statement on providing banking services to money services businesses to clarify the BSA requirements and supervisory expectations as applied to accounts opened or maintained for this type of customer. The statement acknowledged that money services businesses were losing access to banking services as a result of concerns about regulatory scrutiny, the risks presented by these types of accounts, and the costs and burdens associated with maintaining such accounts. The agencies issuing these guidance documents told us they took some steps to assess the effect of their guidance on bank behavior. For example, Treasury officials said that Treasury periodically engaged with banks and money transmitters on an ad hoc basis to learn their views and gain insight into their concerns. According to Federal Reserve officials, anecdotal information suggested that some money transmitters lost bank accounts after FinCEN and federal banking agencies issued the joint guidance in 2005, and that outcome was contrary to the regulators’ intent. To address concerns about the guidance, according to these officials, Treasury held several public discussions on money transmitter account terminations. In addition to issuing guidance, FDIC and OCC took some steps aimed at trying to determine why banks may be terminating accounts because of perceived regulatory concerns. For example, in January 2015, FDIC issued a memorandum to examiners establishing a policy that examiners document and report instances in which they recommend or require banks to terminate accounts during examinations. From January 2015 through December 2017, FDIC officials stated that examiners had not documented any recommendations or requirements for account terminations. In 2016, OCC reviewed how the institutions it supervises develop and implement policies and procedures for evaluating customer risks as part of their BSA/AML programs and for making risk-based determinations to close customer accounts. OCC focused its review on certain large banks’ evaluation of risk for foreign correspondent bank accounts. This effort resulted in OCC issuing guidance to banks on periodic evaluation of the risks of foreign correspondent accounts. The federal banking regulators also met with residents and businesses in the Southwest border region to discuss concerns about derisking in the region. Treasury and the federal banking regulators also participated in a number of international activities related to concerns about the decline in the number of correspondent banking and money services business accounts. For example, FDIC, OCC, and the Federal Reserve participate in the Basel Committee on Banking Supervision’s Anti-Money Laundering/Counter Financing of Terrorism Experts Group. Recent efforts of the group involved revising guidelines to update and clarify correspondent banking expectations. Treasury leads the U.S. engagement with the Financial Action Task Force—an intergovernmental body that sets standards for combating money laundering, financing of terrorism, and other related threats to the integrity of the international financial system—which has issued guidance on correspondent banking and money services businesses. BSA/AML Regulatory Reviews Had Not Evaluated All Factors Influencing Banks to Derisk and Close Branches Executive orders encourage and legislation requires FinCEN and the federal banking regulators to review existing regulations to determine whether they should be retained, amended, or rescinded, among other things. Retrospective reviews of existing rules help agencies evaluate how existing regulations are working in practice. Recent presidents have directed agencies to evaluate or reconsider existing regulations. In addition to the executive orders, the Economic Growth and Regulatory Paperwork Reduction Act (EGRPRA) requires federal banking regulators to review the regulations they prescribe not less than once every 10 years and request comments to identify outdated, unnecessary, or unduly burdensome statutory or regulatory requirements. In February 2018, we reported that FinCEN and the federal banking regulators had all participated in retrospective reviews of different parts of the BSA/AML regulations. For example, FinCEN officials told us that they review each new or significantly amended regulation to assess its clarity and effectiveness within 18 months of its effective date. As part of fulfilling their requirements under EGRPRA, the federal banking regulators— through the Federal Financial Institutions Examination Council (FFIEC)— have also participated in retrospective reviews of BSA/AML regulations. As part of the 2017 EGRPRA review, FFIEC received several public comments on BSA/AML requirements, including increasing the threshold for filing CTRs, the SAR threshold, and the overall increasing cost and burden of BSA compliance. FinCEN officials and the federal banking regulators stated that the agencies are working to address the BSA- related EGRPRA comments—particularly those related to CTR and SAR filing requirements—through the BSA Advisory Group (BSAAG). However, the actions FinCEN and the federal banking regulators took related to derisking were not aimed at addressing and, if possible ameliorating, the full range of factors that influence banks to engage in derisking, in particular banks’ regulatory concerns and BSA/AML compliance efforts. Further, the actions regulators took to address concerns raised in BSA/AML retrospective reviews focused primarily on the burden resulting from the filing of CTRs and SARs, but these actions did not evaluate how regulatory concerns may influence banks to engage in derisking or close branches. Federal internal control standards call for agencies to analyze and respond to risks to achieving their objectives. Further, guidance implementing executive orders states that agencies should consider conducting retrospective reviews on rules that unanticipated circumstances have overtaken. In February 2018, we concluded that without assessing the full range of BSA/AML factors that may be influencing banks to derisk or close branches, FinCEN, the federal banking regulators, and Congress would not have the information they need to determine if adjustments are needed to ensure that the BSA/AML regulations and their implementation are achieving their regulatory objectives in the most effective and least burdensome way. U.S. Data on Remittances Did Not Allow Treasury to Assess the Effects of Money Transmitters’ Loss of Banking Access on Remittance Flows to Fragile Countries In March 2018, we found that Treasury could not assess the effects of money transmitters’ loss of banking access on remittance flows because existing data did not allow Treasury to identify remittances transferred through banking and non-banking channels. Recent efforts to collect international remittance data from banks and credit unions did not include transfers these institutions make on behalf of money transmitters. Since these data collection efforts are designed to protect U.S. consumers, the remittance data that banks and credit unions report are limited to remittances individual consumers send directly through these institutions. Additionally, as of the first quarter of 2018, about half the states (24) adopted reports to collect remittance data from money transmitters and of these, 12 states had made it mandatory to report remittance data by destination country. However, these data do not distinguish money transmitters’ use of banking and nonbanking channels to transfer funds. Finally, we found that while Treasury has a long-standing effort to collect information on travelers transporting cash from U.S. ports of exit, this information did not identify cash transported for remittances. We concluded that without information on remittances sent through banking and nonbanking channels, Treasury could not assess the effects of money transmitter and foreign bank account closures on remittances, especially shifts in remittance transfers from banking to nonbanking channels for fragile countries. Nonbanking channels are generally less transparent than banking channels and thus more susceptible to the risk of money laundering and other illicit financial transactions. Additionally, while risks associated with shifts of remittances to nonbanking channels may vary by country, these risks are likely greater for fragile countries, such as Somalia, where the United States has concerns about terrorism financing. Conclusions and Recommendations for Executive Action The collective findings from our work indicate that BSA/AML regulatory concerns have played a role in banks’ decisions to terminate and limit accounts and close branches. However, the actions taken to address derisking by the federal banking regulators and FinCEN and the retrospective reviews conducted on BSA/AML regulations had not fully considered or addressed these effects. As a result, in our February 2018 report, we recommended that FinCEN and the three banking regulators in our review—FDIC, the Federal Reserve, and OCC— jointly conduct a retrospective review of BSA/AML regulations and their implementation for banks, focusing on how banks’ regulatory concerns may be influencing their willingness to provide services. In their written responses, the Federal Reserve, FDIC, and OCC agreed to leverage ongoing interagency work reviewing BSA/AML regulations and their implementation for banks to address our recommendation. GAO requested comments from Treasury, but none were provided. A lack of data on remittances sent through banking and nonbanking channels limits the ability of Treasury to assess the effects of money transmitter and foreign bank account closures on remittances, in particular shifts of remittances to non-banking channels for fragile countries. Therefore, in the March 2018 report we recommended that Treasury assess the extent to which shifts in remittance flows from banking to non-banking channels for fragile countries may affect Treasury’s ability to monitor for money laundering and terrorist financing and, if necessary, should identify corrective actions. GAO requested comments from Treasury, but none were provided. Chairman Luetkemeyer, Ranking Member Clay, and members of the Subcommittee, this concludes my statement. I would be pleased to respond to any questions you may have. GAO Contact and Staff Acknowledgments If you or your staff have any questions about the issues related to access to banking services along the Southwest border in this testimony or the related report, please contact Michael E. Clements, Director, Financial Markets and Community Investment, at (202) 512-8678 or clementsm@gao.gov. For questions about the issues related to remittance flows to fragile nations in this testimony or related report, please contact Thomas Melito, Managing Director, International Affairs and Trade, at (202) 512-9601, or melitot@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. GAO staff who made key contributions to this testimony are Lawrance Evans, Jr. (Managing Director), Stefanie Jonkman (Assistant Director), Mona Sehgal (Assistant Director), Christine McGinty (Analyst in Charge), Kyerion Printup, Madeline Messick, and David Dayton. Other staff who made key contributions to the reports cited in the testimony are identified in the source products. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.
target: In recent years, some Southwest border residents and businesses reported difficulty accessing banking services, including experiencing bank account terminations and bank branch closings in the region. In addition, the World Bank and others have reported that some money transmitters have been losing access to banking services with depository institutions. This statement is based on findings from GAO's February 2018 report on access to banking services along the Southwest border ( GAO-18-263 ) and March 2018 report on the effects of derisking on remittance flows to fragile countries ( GAO-18-313 ). GAO discusses (1) the extent to which banks are terminating accounts and closing branches in the Southwest border region, (2) the extent to which money transmitters serving selected fragile countries are facing banking access challenges, and (3) actions relevant U.S. agencies have taken to respond to these challenges. For those reports, GAO surveyed more than 400 banks, developed an econometric model on the drivers of branch closures, and conducted case studies on four countries to assess the effects of derisking on remittances flows. “Derisking” is the practice of depository institutions limiting certain services or ending their relationships with customers to, among other things, avoid perceived regulatory concerns about facilitating money laundering or other criminal activity such as financing to terrorist groups. In its February 2018 report, GAO found that money laundering risk is high in the Southwest border region because of the high volume of cash transactions, the number of cross-border transactions, and foreign account holders. According to GAO's nationally representative survey of banks, an estimated 80 percent (+/- 11) of Southwest border banks limited or did not offer accounts to customers that are considered high risk for money laundering because the customers drew heightened Bank Secrecy Act/anti-money laundering (BSA/AML) oversight—behavior that could indicate derisking. Nationally, GAO's econometric analysis suggested that counties that were urban, younger, had higher income, or had higher money laundering-related risk were more likely to lose branches. In March 2018, GAO found that money transmitters (businesses that facilitate global money transfers) serving Haiti, Liberia, Nepal, and especially Somalia— countries it identified as fragile—all reported losing bank accounts or having restrictions placed on them during the last 10 years. As a result, 9 of the 12 money transmitters GAO interviewed, including all 4 that served Somalia, reported using channels outside the banking system (hereafter referred to as nonbanking channels), such as transporting cash to transfer funds, and that this increased their operational costs and exposure to risks. Furthermore, some banks GAO interviewed reported that they closed the accounts of money transmitters because of the high cost of due diligence actions they considered necessary to minimize the risk of fines under BSA/AML regulations. Department of the Treasury (Treasury) officials noted that despite information that some money transmitters have lost bank accounts, Treasury saw no evidence that the volume of remittances was falling or that costs of sending remittances were rising. To address concerns about derisking, Treasury and federal banking regulators (the Board of Governors of the Federal Reserve System, the Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corporation), have taken actions including issuing guidance to banks and conducting some evaluations to assess the extent to which derisking is occurring. While agencies were engaged in BSA/AML regulatory reviews, these were limited in scope and had not evaluated how regulatory concerns may influence banks to engage in derisking or to close branches. Without assessing the full range of BSA/AML factors that may be influencing banks to derisk or close branches, Treasury, the federal banking regulators, and Congress do not have the information needed to determine if BSA/AML regulations and their implementation can be made more effective or less burdensome. Moreover, in March 2018 GAO reported that Treasury could not assess the effects of money transmitters' loss of banking access on remittance flows because existing data did not allow Treasury to identify remittances transferred through banking and nonbanking channels. Nonbanking channels are generally less transparent than banking channels and thus more susceptible to the risk of money laundering and terrorism financing.